"HOUSTON, we have a major problem with all of these homes upside down" "People need to put more money down!!!"
Just the other day, a borrower asked this question on Trulia.
What is the difference/advantages between other FHA loan lenders and the lenders approved for the NJ First-Time Homebuyer Program ?
Response by a realtor : "it is probably not wise to buy a house with 3% down anyway. In my opinion, putting 3.5% down is akin to no down payment at all, and that is what got the housing market into trouble in the first place, among other things. Putting 3% down in a declining market will leave you upside down in a few months."
STOP - It's an opinion, but I think it's a horrible opinion.
So Mr. Realtor, you are saying if I put 10% down, then it would have saved many homes from being upside down and possibly many foreclosures? Or even 20% down? A home buyer then came in and commented. She said :
"That's ridiculous. It’s quite possible for a buyer to have enough resources to handle any major repairs that may arise but still not have enough for a “serious” (I’m assuming you mean 20%) downpayment.
On a $350,000 home a “serious” downpayment would be $70,000.
Even if the buyer had the worst home inspection in the world and had to replace the roof ($20K), the furnace ($6k) and the water heater ($3K) within the first year. The cost of all of those repairs plus the 3.5% downpayment would be around $41,000 which is almost $30K less than the 20% downpayment."
My opinion on the borrowers statements? There is some truth to this comment. Read further.
I replied to this realtor and to the home buyer's comment. Here is what the realtor then said.
My Opinion : I don't have a problem with opinions, but it's the opinions often given in the real estate sector that are just thrown out there because you want to be made as the savior of the end to all real estate crap that has taken place in the last 2 to 3 years.
My Take on this ongoing issue of upside mortgages and adequate down payments when it comes to FHA loans. (please read my two articles below, because they will give you details and good opinions expressed by some very good real estate professionals)
- The real estate mess in the last 2 years was not due to those that used FHA loans and put 3.5% down or even 2.25% down as a down payment.
- Bad economy overall - sorry to sound negative, but many people have lost jobs, it's a fact, and this has caused many of the foreclosures.
- What about those bad loans, such as the stated loans aka liar loans, when not verifying income? Did many of these foreclose?
- Equity position - The argument by this one real estate agent is that if you use a FHA mortgage and put the minimum down, you will be underwater very soon. Okay, that could be true depending on your appraised value, but let me ask you this. Why are you buying the home in the first place. And many people will live in their home for at least 6 years. Food for thought... If you put 10% down and had to sell in 2 years, you will be close to breaking even anyhow, because you normally will be paying a real estate commission of 6%. Again, focus on why you are buying a home.
- Down payment monies - You can get monies in the form of gifts from family members and or grants from the state or counties. It's out there.
Summary : Overall, if you are in the market for a home, you feel secure about a specific mortgage payment, and have spoken to a qualified professional loan officer that has gone over your assets and has explained the process to you, then you should be fine. I have a set of questions to ask a borrower, including their goals. One of my main concerns outside of your mortgage payment is to make sure that you have some reserves left over. I would rather have you put less down and keep more money in your pocket, even if you have 10% down. Sorry, but this makes more sense, even when using FHA loans with 3.5% down. Please just don't be scared of comments such as the ones above. Please read :
- Cash is KING - A larger down payment might not always be your best solution.
UPDATE : The beginning, after Houston, we have a problem... I am against large down payments for many reasons. This should not be the reason not to buy a home. 3.5% down can work and has in the past.
- This is an excellent article by Richard Weisser. It's more than just buying a home. Thanks Richard..
The Government at one time last year was pushing that all FHA loans have a mandatory 5% down. I wrote a series of articles on this :
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